Stocks Technical Analysis Trendlines Part 5

Trend Channels

Trend channels are parallel lines containing a smaller or larger price move. The unparallel lines of a triangle formation also are a trend channel. Trend channels represent support and resistance and can be used within LOCKIT to find price targets.

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Parallel Trend Channels

Let’s look at the trend channels in figure 4.30, a chart with weekly price data.

Figure 4.30: Trend channels.

• A trendline A is formed by a range of higher low points. A parallel line B to the upper part of the prices is the start of what will become the upper side of a long-term trend channel.
  
• The price falls through trendline A and consolidates in a horizontal to slightly decreasing trend channel D.
   
• The consolidation period finishes with a price jump out of channel D and forms a strong rising channel E. This uptrend finishes at the resistance of the upper side of the long-term trend channel B.
• The parallel line C with the long-term trendline B at the bottom of channel D creates the lower part of the broad channel BC. Falling through this trendline in the future will probably be the start of a larger, long-term correction.
  
• The price falling out of channel E makes up the lower part of channel F, a narrower trend channel within the large trend channel with the same slope.
  
• Leaving channel F we get a high accelerating rising channel G a fraction beyond the upper part of the broad channel, but returning back fast inside the long-term channel.
  
• What follows is an equally fast move down with channel H, until reaching the lower part of the long-term broad channel BC.
  
  As long as a channel is valid, the price is moving between the extremes of that channel. The price reaching the upper part or the lower part of a trend channel is, therefore, not only a buying or selling signal, but also a good indication of what price level can be reached in the future.
  
  

Triangle Trend Channel

We also consider a triangle formation as a trend channel.

In figure 4.31, there is an uptrend line between March and April. The resistance line from the top at the beginning of March is broken in April with a rising window, but the price falls back below this resistance line, turning it into a support line by the end of April. A couple of days later, the resistance line is broken again.

The price develops lower tops and higher bottoms; the result is a symmetrical triangle formation. 

A triangle formation is a continuation pattern, but it also can be a reversal pattern. The direction of the price will be clear only after the price breaks out of the pattern, either to the upper or the lower site of the triangle. Most of the time, the triangle is a continuation pattern, and the price will continue to move in the direction of the previous trend. 

Figure 4.31: Triangle trend channel.

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